New Delhi: To protect start-ups from aggressive tax demands, the income tax (I-T) department on Tuesday stayed all recovery proceedings of the so called “angel tax” against start-ups that come under the definition put out by the department of industrial policy and promotion (DIPP).
In a notification issued on Tuesday, the department of revenue has directed assessing officers that “no coercive measure to recover the outstanding demand would be taken” in cases where additions have been made to the income on account of high valuations provided that the start-ups fall within the start-up definition of DIPP.
Further, the notification has directed speedy disposal of pending appeals by 31 March 2018.
The tax provision, also called the “angel tax”, is levied on investments made in unlisted firms at valuations considered higher than the fair market valuation. The tax was introduced through the Finance Act, 2012 as an anti-abuse provision as the government sought to stop the practice of issuing of shares in unlisted companies at a high premium.
In September, Mint had reported on the tax department’s crackdown on some politicians who were accepting bribes by charging a high premium for shares in unlisted companies promoted by them and how this had raised concerns among several start-ups. Valuations of start-up companies are generally high owing to market potential and the novelty of their idea, which brought them under the scanner of the tax department.
The taxman has sent notices to around 30 start-ups so far.
“This is a much awaited step to protect the start-ups retrospectively from the procedural pains of justifying the whole valuation assessed by an angel investor. Faster disposal of appeals by March 2018 shall relieve our entrepreneurs to focus on their business venture and create economic value for India,” said Sunil Goyal, managing director at YourNest, an early-stage venture fund.
On Monday, finance secretary Hasmukh Adhia assured investors that the tax department is only cracking down on investors in unlisted companies where there is a suspicion that the transaction is not genuine.
“We will protect genuine investors in start-ups. We are not asking questions from venture capitalists or non-resident investors who have invested in start-ups. Those start-ups registered with the department of industrial policy and promotion are also not under the scanner,” he said.
Sushil Chandra, chairman, Central Board of Direct Taxes, had pointed out that there have been instances of highly exaggerated valuation but had assured that the tax department will not press for demand till the first appeal is decided.
In the notification, the tax department said that there have been instances where the assessing officers are invoking Section 56 (2)(viib) dealing with angel tax on start-up companies that have “otherwise raised genuine investments based on their idea”. It further said that the assessing officers have been rejecting valuation reports filed by the companies based on the recognized discounted cash flow (DCF) method.
“This comes as a big relief to start-ups. DCF method is widely used and is based largely on future expectations. We are glad the department has accepted this view,” said Archit Gupta, founder and CEO of ClearTax. “The capital raised by start-ups will not attract tax now. With the widening of the definition of startups in the budget, we hope more start-ups can take benefits of tax provisions.”